Pricing policy overhang to limit upside for GSK Pharma

Ability to maintain sales growth and hold on to margins are other critical areas to watch

GlaxoSmithKline Pharmaceuticals (GSK Pharma) delivered December 2012 quarter results largely in line with market expectations. The company grew its sales at a healthy 16 per cent driven by new product launches across product categories. However, higher raw material cost dented margins.

Mehernosh Kapadia, company’s senior executive director-finance, said the rise in raw material cost and the rupee depreciation were primarily responsible for the lower margins. While gross margins were down about 200 basis points (bps) to 57 per cent, earnings before interest, depreciation, tax and amortisation (Ebidta) margins were down about 176 bps year-on-year (y-o-y) to 29.8 per cent.

The company's sales for calendar year 2012 grew 11.2 per cent, with the core pharmaceutical segment growing at 12.5 per cent. The growth was largely volume-driven with nine product launches during the calendar year, two of which were in the fourth quarter. Eleven per cent of the core pharmaceutical growth was accounted for by volumes and the rest by price hikes.

Going ahead, the Street will be watching the impact on the company of the national pharmaceutical pricing policy. The company’s ability to maintain sales growth and hold on to margins are the other critical areas to watch out for. With almost 97 per cent of its sales coming from the domestic market and products being priced at a premium, the company is one of the most sensitive to pricing policy changes in the pharmaceutical space.

It is in this backdrop that analysts are not very enthused about GSK Pharma's prospects. Deepak Khetan assistant vice-president-life sciences, Axis Capital, has a negative stance as he expects Ebitda margins to remain under pressure due to rupee depreciation and the potential risk from pricing policy in the domestic formulations market.

Thus, despite the reasonable performance, the pricing policy overhang rubbed off on the stock, which barely moved post the announcement of results, ending flat at Rs 2,102.95. The stock has been an underperformer over the last year, growing by just one per cent while its peer, the BSE Healthcare index, has made investors richer by 26 per cent. Sarabjit Kour Nangra, vice president-research at Angel Broking, says expensive valuations have been the key reason for the stock’s performance. At the current price, the stock is trading at 23 times CY13 earnings per share estimates against 17-20 times for comparable peers.